CorVel Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2013 (the second quarter of CorVel’s fiscal 2014), compared with the corresponding 2012 periods. The filing cover identifies September 30, 2013 as the period end; this differs from the request metadata’s “2012 Q2.” CorVel provides workers’ compensation and auto medical-cost containment and managed-care services, principally through patient management and network solutions.
Financial performance
| Metric | Three months ended Sept. 30, 2013 | Year-over-year change | Six months ended Sept. 30, 2013 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $119.4 million | +13.2% | $237.5 million | +13.0% |
| Gross profit | $27.3 million | +19.6% | $54.2 million | +17.9% |
| Gross margin | 22.9% | 21.7% prior year | 22.8% | 21.9% prior year |
| Income before tax | $15.1 million | +39.1% | $29.2 million | +33.4% |
| Net income | $8.7 million | +30.8% | $17.3 million | +30.7% |
| Diluted EPS | $0.41 | $0.29 prior year | $0.80 | $0.58 prior year |
- For the six-month period, operating cash flow was $28.5 million, up from $23.9 million. Capital expenditures were $9.0 million, versus $6.3 million; financing cash outflow was $17.2 million, mainly reflecting share repurchases. Cash increased $2.4 million to $22.2 million.
- At September 30, current assets were $100.4 million and current liabilities $62.1 million; working capital was $38.2 million, down $1.9 million from March 31. Accounts receivable rose to $54.4 million.
- CorVel reported no debt outstanding. Its renewed revolving credit facility provides up to $10 million and expires September 2014. The company reported $8 million of letters of credit, separately issued and not reducing stated borrowing availability.
- Six-month diluted weighted-average shares declined 5.8% to 21.5 million, largely due to repurchases. The board expanded the lifetime repurchase authorization to 34 million shares. CorVel repurchased 657,615 shares for $19.7 million in the six months and a further 72,387 shares for $2.7 million through November 4.
Changes, outlook, and risks
- Growth came mainly from patient management services, including increased work from new and existing third-party administrator customers; network solutions growth was supported by pharmacy services and group-health bill review. Six-month patient-management revenue rose 14.0%, and network-solutions revenue rose 11.7%.
- Management attributed higher costs to increased labor needs in TPA services and higher prescription-processing volume. It said scale was beginning to slow the rate of labor-cost increases, but expected continued TPA growth could pressure margins unless operating efficiency improves, prices rise, or higher-margin services grow. Management also expected labor and occupancy costs to rise with revenue.
- The quarterly effective tax rate was 42.5%, versus 38.9% a year earlier; management expected it to fall to 40%–41% in the next fiscal year. The filing attributes the quarter’s increase partly to a tax-rate review, including bonus-depreciation analysis.
- No formal revenue or earnings guidance is provided. Management said cash and anticipated internally generated funds should cover expected needs for at least 12 months. It cited potential risks including fewer workers’ compensation claims, competition and pricing pressure, customers bringing work in-house, labor costs, regulation, technology and data-security issues, and litigation.
- Other notable items: a two-for-one stock split was effected in June 2013, with prior share and per-share figures retroactively adjusted. A $2.343 million software license was obtained under a financing agreement. Contractual obligations totaled $46.2 million, including $42.6 million of operating leases. Management said ordinary-course litigation was not expected to result in material payments; no material impairment was identified at September 30.
Important facts for investors to verify
- Whether TPA and pharmacy-driven growth can continue without sustained gross-margin pressure.
- Accounts-receivable growth and operating cash conversion as revenue expands.
- Share-repurchase pace, remaining authorization, and its effect on cash available for investment or acquisitions.
- Actual effective tax rate versus management’s 40%–41% expectation, and the resolution of uncertain tax positions.
- Capital spending, data-center and software commitments, and compliance with credit-facility covenants.
- Exposure to claim-volume trends, customer retention, competitive pricing, regulatory changes, and data-security or operational interruptions.